Siga Technologies, Inc. v. Pharmathene, Inc.

Facts

D acquired an antiviral drug for the treatment of smallpox. D experienced difficulty developing the drug and was running out of money. D contacted P. P desired a merger between the two companies, but D resisted. D insisted on framing a license agreement before discussing a merger. D needed an immediate cash infusion to stabilize its financial situation. Conservative estimates valued the smallpox drug at approximately $1 billion. The parties outlined the terms of a license agreement. P sent D a proposed term sheet based on his discussions with D about a license agreement. D replied that it was most interested in trying to make this a mutually agreeable term sheet and moving on to the next step. Negotiation focused on upfront cash payments and funding guarantees. Eventually, D requested that P make two changes and if the changes were acceptable to P, then 'we have got a deal on the term sheet, and it's ready to present to your board for approval.' The term sheet was presented at P's board meeting, The term sheet was not signed and the minutes do not state that the board approved the term sheet. P then told D that the parties had 'a deal' and could move on to discussing a merger. A clean copy was made of the two-page license agreement term sheet incorporating D's two changes (the LATS). The LATS recites that the parties intended to 'establish a partnership to further develop & commercialize the drug for the treatment of smallpox and orthopox related infections and to develop other orthopox virus therapeutics.' The LATS also sets forth terms relating to, among other things, patents covered, licenses, license fees, and royalties. The LATS was not signed, and a footer on both pages states, 'Non-Binding Terms.' P then decided that it preferred a merger instead of a license agreement, so representatives met to begin merger discussions. D asked for bridge financing so that D could continue developing the drug while merger negotiations proceeded. P agreed to consider raising funds for a bridge loan on the condition that P would obtain at least a license if merger negotiations fell through. P sent a draft merger term sheet that included the following provision regarding a license agreement: P and D will negotiate the terms of a definitive License Agreement in accordance with the terms set forth in the Term Sheet . . . attached on Schedule 1 hereto. The License Agreement will be executed simultaneously with the Definitive [Merger] Agreement and will become effective only upon the termination of the Definitive [Merger] Agreement. D understood that P wanted to negotiate two documents at once.  On February 22, 2006, P again stated its desire to execute simultaneously a merger agreement and a license agreement (in case the merger did not close). D told P it was not going to pay lawyers to draft a formal license agreement and suggested P just attach the LATS to the merger agreement. D told P that 'this approach would be as good as a license agreement and would guarantee P, at a minimum, a license if negotiations for a merger fell through.' P reviewed a final merger term sheet, which specifically referred to the LATS and included a copy of the LATS as an exhibit. D again reiterated that 'in any case, if the merger doesn't close, P will get its license. The parties signed a merger letter of intent and attached the merger term sheet and the LATS. P and D entered into a Bridge Loan Agreement. P loaned D $3 million for expenses. The Bridge Loan Agreement designates New York law as its governing law. It also specifically contemplates that the parties might not ultimately agree on either a merger or a license agreement. Section 2.3 obligates the parties to negotiate in good faith a license agreement in accordance with the terms of the LATS if the merger is terminated. P and D signed the Merger Agreement, which selects Delaware law as its choice of law. Merger Agreement Section 12.3 is substantively identical to Bridge Loan Agreement Section 2.3 and provides that if the merger is terminated, the parties agree to negotiate in good faith a definitive license agreement in accordance with the LATS's terms. D began experiencing seller's remorse after it received a $5.4-million-dollar grant from the National Institutes of Health. D also prepared to perform the first human trial. The NIH then awarded D $16.5 million to develop the drug. After receiving this grant, D representatives expressed remorse over having agreed to the merger. September 30 was the merger drop-dead date. The SEC still had not approved D's draft proxy statement. P asked D to extend the drop-dead date. On October 4, D's Board of Directors decided to terminate the Merger Agreement. Shortly after terminating the Merger Agreement, D publicly announced it had received the $16.5 million NIH grant and that the drug provided 100% protection against smallpox in a primate trial. D then sold two million shares of its stock at $4.54 per share, more than three times D's 2005 share price.  P hired an attorney to draft a licensing agreement with D. P mailed the Proposed License Agreement to D. P stated that it was ready to sign the Proposed License Agreement because it contained 'all the essential terms of a license agreement and is completely consistent with the [LATS].' During subsequent meetings, D began to backtrack on the economic terms in the LAT's agreement. Eventually, D sent a 102-page Draft LLC Agreement. The Draft LLC Agreement included the following economic changes: (1) the upfront payment from P to D increased from $6 million to $100 million; (2) the milestone payments to D increased from $10 million to $235 million; (3) the royalty percentages owed to D increased from 8%, 10%, and 12% depending on the amount of sales to 18%, 22%, 25%, and 28%; and (4) D would receive 50% of any remaining profit whereas the LATS provided for profit sharing only from U.S. government sales having a margin of 20% or more. Other changes included: (1) D's right to resolve disputes unilaterally; (2) D's ability to block any distribution to P; (3) P's obligation to fund fully the LLC's costs, despite having to split profits 50/50; and (4) D's right to terminate the LLC under certain conditions, with P having no right to cure and with all rights to the product reverting to D. D disputed that the LATS was binding because of the 'Non-Binding Terms' footer, and it never addressed P's proposed profit split. P filed suit in the Court of Chancery. P asserted breach of contract, promissory estoppel, and unjust enrichment. D moved to dismiss and the Vice Chancellor denied that motion. The Vice Chancellor determined that D was liable for breach of its obligation (under the Bridge Loan and Merger Agreements) to negotiate in good faith a definitive license agreement in accordance with the LATS's terms and that D was also liable under the doctrine of promissory estoppel. The Vice Chancellor found that the proper remedy was an equitable payment stream approximating the terms of the license agreement to which he found the parties would ultimately have agreed. D appealed and P cross-appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2024 ABN Study Partner.